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Nominal Exchange Rates Adjustment and Long-Run Competitiveness in Less Developed Countries

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Holmes, M ()

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Abstract

This empirical paper explores the important policy issue of whether or not LDCs can achieve a long-run real exchange rate devaluation through a nominal devaluation. For this purpose, tests for cointegration and the estimation of the long-run relationship between the real and nominal exchange rate is by a range of recently developed panel data techniques advocated by Pedroni. Using a panel of nineteen LDCs over the period 1973-2001, this study employs fully modified OLS and dynamic OLS to estimate a group-mean long-run elasticity between the nominal and real US dollar exchange rate of about one quarter. However, there is considerable variation across the sample of LDCs where the evidence indicates that the effectiveness of a nominal devaluation is inversely related to the domestic inflation rate.

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Article provided by Euro-American Association of Economic Development in its journal Applied Econometrics and International Development.

Volume (Year): 4 (2004)
Issue (Month): 3 ()
Pages:
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Handle: RePEc:eaa:aeinde:v:4:y:2004:i:1_18

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Find related papers by JEL classification:
E0 - Macroeconomics and Monetary Economics - - General
F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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  1. McNelis, Paul D., 1987. "Indexing, exchange rate policy and inflationary feedback effects in Latin America," World Development, Elsevier, vol. 15(8), pages 1107-1117, August. [Downloadable!] (restricted)
  2. Rana, Pradumna B & Dowling, J Malcolm, Jr, 1985. "Inflationary Effects of Small but Continuous Changes in Effective Exchange Rates: Nine Asian LDCs," The Review of Economics and Statistics, MIT Press, vol. 67(3), pages 496-500, August. [Downloadable!] (restricted)
  3. Nagayasu, Jun, 2002. "Does the Long-Run PPP Hypothesis Hold for Africa? Evidence from a Panel Cointegration Study," Bulletin of Economic Research, Blackwell Publishing, vol. 54(2), pages 181-87, April.
  4. Pedroni, Peter, 1999. " Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 653-70, Special I. [Downloadable!] (restricted)
  5. Alba, Joseph D. & Papell, David H., 1998. "Exchange rate determination and inflation in Southeast Asian countries," Journal of Development Economics, Elsevier, vol. 55(2), pages 421-437, April. [Downloadable!] (restricted)
  6. Bahmani-Oskooee, Mohsen & Miteza, Ilir, 2002. "Do nominal devaluations lead to real devaluations in LDCs?," Economics Letters, Elsevier, vol. 74(3), pages 385-391, February. [Downloadable!] (restricted)
  7. Pesaran, M. H. & Shin, Y. & Smith, R. J., 1996. "Testing for the 'Existence of a Long-run Relationship'," Cambridge Working Papers in Economics 9622, Faculty of Economics, University of Cambridge.
  8. Bahmani-Oskooee, Mohsen, 1993. "Purchasing power parity based on effective exchange rate and cointegration: 25 LDCs' experience with its absolute formulation," World Development, Elsevier, vol. 21(6), pages 1023-1031, June. [Downloadable!] (restricted)
  9. Bahmani-Oskooee, Mohsen & Malixi, Margaret, 1992. "Inflationary Effects of Changes in Effective Exchange Rates: LDCs Experience," Applied Economics, Taylor and Francis Journals, vol. 24(4), pages 465-71, April.
  10. Menon, Jayant, 1995. " Exchange Rate Pass-Through," Journal of Economic Surveys, Blackwell Publishing, vol. 9(2), pages 197-231, June.
  11. McNown, Robert & S. Wallace, Myles, 1989. "National price levels, purchasing power parity, and cointegration: a test of four high inflation economies," Journal of International Money and Finance, Elsevier, vol. 8(4), pages 533-545, December. [Downloadable!] (restricted)
  12. Anindya Banerjee & Massimiliano Marcellino & Chiara Osbat, 2005. "Testing for PPP: Should we use panel methods?," Empirical Economics, Springer, vol. 30(1), pages 77-91, January. [Downloadable!] (restricted)
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  13. Mahdavi, Saeid & Zhou, Su, 1994. "Purchasing power parity in high-inflation countries: further evidence," Journal of Macroeconomics, Elsevier, vol. 16(3), pages 403-422. [Downloadable!] (restricted)
  14. Peter C.B. Phillips & Bruce E. Hansen, 1988. "Statistical Inference in Instrumental Variables," Cowles Foundation Discussion Papers 869R, Cowles Foundation, Yale University, revised Apr 1989. [Downloadable!]
  15. Peter Pedroni, 2001. "Purchasing Power Parity Tests In Cointegrated Panels," The Review of Economics and Statistics, MIT Press, vol. 83(4), pages 727-731, November. [Downloadable!] (restricted)
  16. Taylor, John B., 2000. "Low inflation, pass-through, and the pricing power of firms," European Economic Review, Elsevier, vol. 44(7), pages 1389-1408, June. [Downloadable!] (restricted)
  17. Connolly, Michael B & Taylor, Dean G, 1979. "Exchange Rate Changes and Neutralization: A Test of the Monetary Approach Applied to Developed and Developing Countries," Economica, London School of Economics and Political Science, vol. 46(183), pages 281-94, August. [Downloadable!] (restricted)
  18. Pasaran, M.H. & Im, K.S. & Shin, Y., 1995. "Testing for Unit Roots in Heterogeneous Panels," Cambridge Working Papers in Economics 9526, Faculty of Economics, University of Cambridge.
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  19. Dalia Hakura & Ehsan U. Choudhri, 2001. "Exchange Rate Pass-Through to Domestic Prices: Does the Inflationary Environment Matter?," IMF Working Papers 01/194, International Monetary Fund. [Downloadable!]
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